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Mark's Market Blog

7-24-10: 3rd World Government, Coming Soon to a City Near You

By Mark Lawrence

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Stocks were up and down this week, recovering from last Friday's drop, then dropping again, then recovering again to nearly the 200 day moving average again. I expect we'll bounce off the underside of the 200 day again at least one more time. However, it seems clear that the trend for the next few weeks is up, and I expect stocks will break through sooner or later. When they do, institutional investors fearing to be left behind, will join into the market, and the increase of cash should increase volume and prices for a while.


S&P 500 January 16 2010 to July 9 2010

The European bank stress tests are out. Two months ago everyone was afraid of the PIIGS defaulting and taking down the European banks. So to reassure everyone, Europe is "stress testing" their banks. The tests assume no sovereign default, and consider the possibility that growth in Europe next year might possibly be as bad as a 1% decline. The tests were carefully calibrated to make sure that several small Spanish banks fail (that proves the tests were genuine), but no major French or German banks fail (that proves that Europe is in great shape.) So, if it's not the banks being tested, what is it? It's a test of the various country's governments and central bankers ability to agree to something and pull it off. Of course the thing they would agree to is as bland as a bowl of cream of wheat. Their conclusion: Everything's fine, buy European bonds, let them keep borrowing at low rates. My conclusion: this will not end well.

China's property market is starting to look quite worrisome. China has been building infrastructure like mad as a way to employ people and get something out of their work. Unfortunately the planning portion of this has been lacking. Currently it's believed that as much as 25% of their banks loans are non-performing. This is especially striking as their total real estate loans have increased by 40% in the last year. Couples that make $8,000 per year are buying $150,000 condos. Not only is this scary in and of itself, but the market for used condos almost doesn't exist - no one is interested in used anything in China. If this market heads south, no one will be able to get out. There are state limits on what local governments can borrow to meet their growth goals, but it's common for local governments to form corporations to build airports and subways, and then have those corporations borrow the money off government books. It's estimated that less than 25% of such corporations are generating enough cash flow to service their debt. China has been having a good old time the last couple of years laughing at the excesses of western capitalism, but more and more it appears their day will come.

In the last three weeks the Euro has jumped up, briefly hitting $1.30. This most likely won't last. The Economist magazine has a currency measure, "the Big Mac Index," comparing the cost of Big Macs world wide. They claim this is easy to research, and a Big Mac is available world-wide, a uniform product produced locally, and includes food, rent, power, and labor. Their tongue-in-cheek index has been no particularly worse than other far more complicated indices over the years, and better than many. Currently the Big Mac shows the Euro over-valued by about 15%, implying a Euro that buys about $1.10.

Two weeks ago the LA Times broke a story about the city manager of Bell, CA, who makes $890,000 per year with guaranteed raises of over $100,000 per year for the next five years. Today he agreed to resign at the end of August with no severance package. Bell released a letter from Mayor Oscar Hernandez in which he praised Rizzo's service to the city and said his nearly $900,000 annual salary was justified. Interestingly, Mayor Hernandez owns a house at 3700 Bell Avenue, which is occupied by his children, and a meth lab was found on the property. Want to visit a 3rd world country? Fly to LAX, drive 15 miles due east.

Oregon's public retirement funding costs will double next year, from 5.2% of payroll to 10.8%. California's Calpers required $172 million in state contributions 10 years ago, next year that will be $3.6 billion. 40 of the states are in some sort of budget trouble. The cuts in other areas to support the retired 50 year old cops are going to be a huge anti-stimulus next year.

RealClearPolitics.com projects the democrats will most likely maintain control of the senate with perhaps 52 to 54 seats. They consider the house too close to call at this time. Republicans are raising a lot more money than democrats.

The International Energy Agency said China devoured 2,252 million tons of oil equivalent last year, or about 4% more than the U.S. "The fact that China overtook the U.S. as the world's largest energy consumer symbolizes the start of a new age in the history of energy," IEA chief economist Fatih Birol said in an interview. The U.S. had been the biggest overall energy consumer since the early 1900s, he said.

Mirror, mirror on the wall, who's the biggest leech of all? US households started net paying down debt 20 months ago, US businesses about a year ago. But don't worry about the banks and bond salesmen, the US government has stepped up to take up the slack. It's important to "stimulate the economy." Obama's own economists estimate that every time the government spends a dollar, the GDP contracts by about 15 cents. One university professor claims his numbers show a dollar of government spending contracts the GDP by $3.12. Every time you spend a dollar, the GDP expands by about $3.


US Borrowing, 1999 - 2010

Unemployment, the unspeakable truth, part II. We apparently have 12 million or so people who used to hammer nails and such, but that we no longer need. What do we do with them? Options: A) Pay them unemployment benefits for life; B) Send them to classes so that in 8 months you have a guy who used to hammer nails and such, and now kinda sorta knows how to poke around with Word and Excel; C) Let them starve. Houses are getting foreclosed about three times as fast as they're selling. Assembly jobs are moving to Asia as fast as Walmart can order up more junk. But Washington hopes and believes that if they just borrow enough money and stick enough thumbs in leaking Union dikes, we can grow our way out of this. It's a real problem: none of these pigs will fly.

For a couple generations now, about 40% of Americans get some sort of college degree. However, other countries are changing their systems and standards to graduate more people - Canada gets degrees to 56% of their youth. Almost 70% of US high school graduates enroll in some sort of college, but nearly half of them don't finish. Spain lowered their degree requirements several years ago, now in Spain you need a Masters degree to get a decent job. Businessmen aren't fooled by bogus degrees handed out by a retired circus magician, even if he does fancy himself "The Great and Powerful Oz." However, as unemployment stays high and there are no jobs for unskilled youth, you may safely presume that our government will find ways to get more people enrolled in college and buy more degrees for more people. I guess the new graduates in Feminist Studies can be hired to teach more Feminist Studies classes to more people.

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